SECOND COMMISSIONER OF TAXATION
1 December 2010
Mr Ali Noroozi
Inspector-General of Taxation
GPO Box 551,
Sydney NSW 2001
Thank you for the opportunity to comment on the Inspector General of Taxation's (IGOT) report 'Review of the Australian Taxation Office's Change Program', dated December 2010.
The Australian Taxation Office's Change Program has been a very significant undertaking which commenced in 2004 and the contract was closed on 30 June 2010. During the last six years substantial additional scope was added and some of the original deliverables were removed from the scope of the contract.
As noted by the Australian National Audit Office (ANAO) in a report titled "The Australian Taxation Office's Implementation of the Change Program: a strategic overview' dated October 2009.Largely because of legislation changes, the Tax Office expanded the scope of the Change Program several times..." The most notable of these changes was the Superannuation Simplification legislative reforms which added almost $200 million to the original business case of $445 million.
In addition to increasing the overall cost of the Change Program, the various legislation changes meant that it would take the ATO considerably longer, than originally planned, to complete the program of work. It is acknowledged, however, that there were other factors which caused delays.
The Change Program has already provided significant savings for the ATO. Independent analysis of internal efficiencies already identified, that are directly related to the Change Program, suggest a four year payback for the ATO for the self funded parts of the program. This is clearly a very short period of time to recover the self funded part of the cost of the Change Program and demonstrates achievement of planned benefits by the ATO.
The largest and most complex part of the Change Program was the Income Tax system which was deployed into our integrated system in late January 2010. This system replaced a thirty year old mainframe system and is being used to process all individual, company, partnership and trust return forms. The new Income Tax system, which has over 1.5 million lines of new code and extensive configuration tables, is the largest information technology implementation ever undertaken by the ATO. It took over two years to build at a cost of about $400 million. Our independent assurers have noted that this system is perhaps the largest IT system ever deployed in Australia - including both the public and private sectors.
Earlier this year this deployment attracted a lot of media interest and other comments because of delays experienced in the processing of income tax returns. With the deployment of a system as large and complex as the Income Tax system, there was always going to be significant delays and the ATO had warned of this for a number of years. In particular, the ATO took active steps to directly inform tax agents and their professional associations that the ATO would have to stop processing returns for several weeks leading up to the deployment.
The new Income Tax system provides the ATO with a modern platform and processing system which will serve Australia's taxpayers well for many years into the future. Despite some problems in the early phases of bedding down the new system, it is now performing well overall and any identified issues are being managed. During our very busy Tax Time 2010 period, as at 14 November 2010, we have finalised the processing of 10.23 million returns and issued 8.4 million refunds with a value of $21.69 billion. In relation to individual returns lodged electronically the ATO:
- Finalised the processing of 54% of returns received in July within 14 days (94% were finalised in 29 days);
- Finalised the processing of 90% of returns received in August within 14 days;
- Finalised the processing of 93.2% of returns received in September within 14 days; and
- Finalised the processing of 95.2% of returns received in October within 14 days.
Deployment of the new Income Tax System
In the lead up of the deployment of the new Income Tax system, the ATO undertook very broad ranging consultation, communication and engagement activity to inform taxpayers, tax agents and professional and industry associations which represent tax agents, that there would be delays for many weeks in the processing of tax returns. The various professional associations were a key part of these communication activities because the ATO has longstanding protocols that the professional associations should be the main conduit between the ATO and tax agents.
Overall, these communications were largely directed at the tax profession because taxpayers who lodge their own return should have done so by 31 October 2009.
It was made clear in ATO communications that all returns lodged after the end of December 2009 and up to mid February 2010, could not be processed until the new system was implemented and these returns would have to be stockpiled. This approach enabled the ATO to complete the processing of returns in the old system, before the end of January 2010, when we had to convert a very large amount of data from the old to the new system. This required the conversion of 27 million taxpayer records, 32 million accounts and 282 million forms.
One of the unique complexities of this deployment was that the new system had to have the tax changes for each of the years 2001 to 2009 incorporated to enable the ATO to process current and prior year returns as well as amendments. This meant that the ATO had to build and test the functionality for the 2009 tax year as well as the code for each of the previous eight years.
Stockpiling of Returns
The end of January 2010 was chosen for the deployment of the new Income Tax system because while the ATO processes over 14 million returns a year, during the January/February period we typically would only receive about 5% of these returns. Despite January and February being a quieter period, by mid February 2010 there were approximately 700,000 income tax returns stockpiled in the ATO.
In the various ATO website updates issued during the February to June 2010 period, it was noted that the ATO estimated that approximately half of the returns expected to be lodged between January and June would result in a refund. Of the 3.8 million returns processed in that period 55% resulted in a refund.
The ATO communications leading up to the deployment of the new Income Tax system encouraged taxpayers and their agents to file as many returns as possible before the end of December 2009, particularly those returns where a refund was expected. Amongst other things, this included the ATO telephoning over 3800 tax agents, who would normally lodge more than 100 returns during December and January, to remind them of the delays which would be experienced and again, they were encouraged to lodge as many returns as possible before the end of December 2009.
It is clear that some taxpayers and tax agents took note of the ATO's communications and lodged more tax returns before the end of December 2009, particularly returns where refunds were expected. A number of tax agents have advised the ATO that they were able to plan their work to take account of the period of time the ATO needed to stockpile returns and thereby minimise the impacts of the deployment of the Income Tax system. The ATO has provided you with the contact details for a number of these agents.
However, putting aside the change in the number of returns lodged in the year ended 30 June 2009 because of the Tax Bonus, there was very little overall change in the flow of returns received during December 2009 to March 2010 compared to the same period in the previous two years. It is now clear that the very extensive communications the ATO undertook were not successful in bringing about any significant change in the lodgement pattern of taxpayers and their agents. Clearly it would have been very beneficial if more returns were lodged before the end of December 2009 but it is appreciated that it may have been difficult for some agents to do this.
Processing of Returns
During December 2009 and January 2010 the ATO worked hard to finalise the processing of as many returns as possible. By the end of December there were 120,498 unprocessed returns on hand and this compares favourably to the number of unprocessed returns on hand at 31 December 2007 — 156,497 and 31 December 2008 — 228,634.
During January 2010 the ATO finalised the processing of 84,853 of the returns on hand at the end of December 2009 and issued 56,697 refunds. Most of the remaining unprocessed returns (35,645) were included with the returns to be processed in the new system. However, some of these returns were held due to the need to investigate possible overstated or fraudulent claims.
Full processing of returns in the new Income Tax System commenced in mid February 2010 and by the end of February 2010, all stockpiled returns (over 700,000) were entered into the new system. A further 300,000 returns were lodged by the end of February. After two weeks of processing by the end of February, we had finalised the processing of over 560,132 returns and issued 250,540 refunds.
While large numbers of returns were able to be successfully processed during the period from February to June 2010 (see Attachment 1); the delays experienced by some taxpayers and agents caused great concern.
There was a large increase in the number of complaints received and the number of requests for urgent refund processing was also much higher. As noted in your report, our people in the ATO worked very hard to finalise the processing of all returns and deal with client enquiries and complaints.
From early February to late April 2010 there was significant media interest in the delays experienced with the processing of tax returns. The ATO sought to keep the community informed by issuing a number of website updates detailing the number of returns being processed as well as the number of assessments and refunds which had issued or would shortly issue. At the same time and in order to keep tax agents abreast of developments, more detailed information was provided to their professional associations and to tax agents directly.
Where a taxpayer or an agent was waiting for an assessment or refund, understandably the broader information provided in the website updates did not help them find out what was happening with the processing of their particular assessment and refund. It was necessary for these taxpayers and agents to contact the ATO directly and although many additional staff were available to answer calls, at times due to the volume of calls received, it was difficult to speak with an ATO officer. Furthermore, our people were becoming familiar with a new system and initially they were not always able to assist taxpayers and their agents as much as they would have liked.
Given the reaction of taxpayers and tax agents in the early part of this year, clearly some of the ATO's communications were not fully understood and with the benefit of hindsight, we could have structured some of our communications differently.
For example, it is now apparent that some tax agents believed that once we had started to use our new system all stockpiled returns would be processed and assessments finalised within a very short period of time, if not immediately. The reality always was that it would take the ATO many weeks after mid February, to complete the processing of the stockpiled returns. Although we had frequently mentioned in our communications there would be extended delays, more contextual information would have been helpful to enable taxpayers and their agents to gain a greater appreciation of the time it would take the ATO to process the stockpiled returns.
Another example is the steps the ATO took to inform tax agents and their professional associations about the new notices of assessment and statements of account which were issued by the new Income Tax system. Although these new notices and statements were designed with significant input from tax agents, some agents were dissatisfied with a number of aspects of the notices and statements.
Our communications highlighted the changes that tax agents would see and copies of the new notices and statements as well as supporting material, were made available to agents and professional associations in December 2009 and again in January 2010. However, we underestimated the time it would take for some agents to become familiar with these new forms and then consider the implications for their practice given the number of extra pages of information agents would receive for each of their clients. It is now clear that on occasion the detailed information provided to professional associations was not always understood and sometimes not passed onto tax agents. Overall, the ATO should have communicated more directly with agents during this period.
A number of changes have already been made to both the notices and statements which have been based on the feedback we have received.
Risks with the deployment of the Income Tax system
The deployment of a system of the size and complexity of the new Income Tax system always comes with considerable risks. As already noted, in addition to being the largest information technology system ever deployed by the ATO, the ATO's independent assurers have noted that this system is perhaps the largest IT system ever deployed in Australia — including both the public and private sectors.
Your report notes that at the time of deploying the new Income Tax system, there were a number of known defects in the system and it was likely that new defects would be found once the system was in use. Given this the ATO had comprehensive mitigation strategies in place and these are also referred to in your report.
A separate independent review undertaken by CPT Global, after the deployment of the Income Tax system, concluded that the ATO had "...successfully implemented a complex program of work". In that report it also noted that "...No deployment is totally without risk and while there have been some impacts on the Tax Community; the Tax Office has significantly mitigated the impacts through its risk management and governance processes."1
One of the steps to mitigate the risks of the deployment of such a large and complex system was the use of a Safety Net to stop the processing of certain returns if we were not confident that an assessment would be correct. This often, but not always, required a change to the system before the processing of the returns could be finalised.
Your report notes there were a number of different issues and problems the ATO had to resolve during the early stages of the implementation of our new system. However, two larger problems arose and the first of these stopped the processing of returns for ten days in early March. Understandably this had a direct impact on those taxpayers and agents who were awaiting an assessment and perhaps a refund.
In early March a change was being introduced to the system which had the unintended consequence of altering the notices of assessment for about 145,000 returns. Although all the calculations in these assessments were correct, the change made to the system resulted in the taxable income being shown as nil, irrespective of the actual taxable income. In order to correct these notices of assessment we had to "back out" each return from the system and then recommence processing. With the new system only being in use for a few weeks this proved to be difficult and it took us longer than we expected to rectify this problem.
The second problem occurred in the second week of April when about 140,000 cheques were not printed. Again, another change to the system had unintended consequences. Once we became aware of this problem cheques were printed and issued within one week.
The Change Program was an ambitious and far reaching program for the ATO. Our people and the various contractors involved worked very hard for a number of years and we appreciate the supporting comments you have made in this regard.
We want to thank you and your staff for a comprehensive and thorough report of the Income Tax release and the ATO is committed to learning from this experience to further improve our ability to deliver major information technology reforms.
The ATO response on each recommendation is at Attachment 2.
Australian Taxation Office
Attachment 1: Individual and Non Individual Tax Returns — Flow of Returns Where Processing and Refund Issued was Completed
|Processing Completed||Refunds Issued|
|January 2010||84,853 *||56,697|
* Processed in old system (120,498 unprocessed returns were on hand at 31 December 2009)
ATTACHMENT 2: Response to Recommendations
[The IGT has placed the ATO's response to recommendations in Chapter 4 to reduce duplication.]
1 CPT Global, Release — Income Tax Implementation Review, report to the Australian Taxation Office, August 2010.